Saturday, March 9, 2013

Can you really trust financial advisers? ... the conversation continues ...

Back in February I mentioned a worthwhile post at LinkedIn from the Society of Physician Entrepreneurs entitled, "Can you really trust any financial adviser or expert to put your interests first above their own?"  The conversation is still continuing and worth a renewed look if you have any interest ...

my first post can be found here

The LinkedIn post can be found here

I invite you to click here to comment on your own experience with a financial advisor along with your thoughts on how the industry can be improved.

== My latest comment on the SOPE discussion starts here ==
The truth is that all of us can agree that 98% of all Financial Advisors' out there are really doing the minimum "portfolio re-balancing" and generic mutual fund diversification.  I'm sure you will agree that the amount of potential clients we meet with that show us their current advisor's portfolio allocation is abysmal at best.  Most advisors' put their clients in 20 to 30 equity/bond correlated mutual funds and they give the client the assumption that they are protected from declines.  As we saw in 2008 when ALL world's equity markets declined 30 - 80% ... showing the masses that no matter where you were invested ... there was no protection.

A properly diversified approach involves investing in non-correlated assets / strategies ... which is something that is foreign to most advisors.

With all this said, I was on a conference call yesterday with a client of my who happens to be a 20 year veteran of the industry (a Financial Planner who manages over 1 Billion in assets) and he mentioned something insightful and related to our discussion.  He said ... he can't imagine starting a financial planning business in today’s market because there really is no chance for profitability until you get a sizable amount under management.  He mentioned in the olden days how they would sell loaded funds to get some initial profit and that got them over the initial hump until they built up their client base.  He said these days ... the chance of achieving profitability since fees are much lower is very difficult without a large number of clients under management.  And if you think about it ... he is partially correct.

1% of 1 million is only 10k, which certainly is A LOT of money, but to the advisor ... certainly not enough to pay his bills ... so unfortunately for most, it becomes a numbers game.  It becomes more important for him to get 50-100 clients than to service his existing ones.  The average financial planner has no more than 20 clients with less than 15 million in total assets, that’s 150k a year BEFORE expenses, taxes, etc …

I am by NO means trying to justify the lack of service or worse … giving clients a false perception of safety, and I am by NO means saying the industry should charge more, but I certainly can appreciate the dilemma. 

One could argue this is just simply supply and demand and the industry needs to shrink a bit to get the riff raff out ultimately creating a better product for the masses, but this solution also ultimately keeps the larger firms that are interested in keeping the status quo alive and well, and the smaller independent shops that might actually be in it for the love of helping people … out.

Lowering fees might not be the specific answer.  Having a higher end product that focuses on the client is certainly a good step … but one wonders based on what I mention above if this just isn’t possible based on the compensation structure and time it takes to truly deliver a quality product to their customers.

This is why I always encourage people to not focus on the fee specifically, but look at the end result … how much can this person make me AFTER fees.  If I pay more in fees, but he delivers more in performance AFTER fees … who cares what he charges in a sense …  We have become so fixated on low cost that I think we as a masses have forgotten to focus on quality.  This is the ole’ Wal Mart vs. the mom and pop store dilemma …

Bottom line … we all agree that the system is broken, but I’m just not sure if there is a solution which solves the long term problem??

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?


  1. Randall,
    Managing conflicts of interest is a challenge in any incentivized environment.

    Clients (at least the moderately educated ones) know this, as they encounter it everywhere in their life. However, "It couldn't happen to me" is still a strong mask to the real risks.

    However, how do we communicate with our audience so as to not simply increase their cynicism and opt-out? (see; declining voter turnout)

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